The Internet of Things explained & how to benefit from it

In 2008, there were already more “things” or objects connected to the Internet than people. By 2020, it is estimated that the number of Internet-connected things will reach 50 billion. A recent research report compiled by McKinsey forecasted that the total economic impact of the IoT on the global economy could reach US$11.1 trillion per year by 2025.

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Two ways to benefit from the Industrial Internet of Things

Companies operating in the oil & gas and mining sectors are rapidly discovering the power of the IoT. These Industrial Internet of Things (“IIoT”) are already changing the way we work as companies are increasingly using machines and network systems to automate tasks that can be completed at lower cost and to a higher quality. This automation will allow people to focus on human elements such as creativity and problem-solving creating a blended workforce of humans and machines to deliver outcomes that were previously unattainable.

For investors, the value generated from IIoT can be realised in two ways.

1. Companies investing in the technology will see improved performance

This should result in measurable cost reduction resulting in margin improvement. In a study published by General Electric (GE US), it was concluded that the average daily financial loss resulting from downtime on an oil rig due to repair and maintenance is approximately US$224,000. When multiplied by the statistical average of nine days of downtime per year this equates to US$2 million in losses due to reactive maintenance. General Electric claims their new “Predix” technology can remove the need for any downtime due to its predictive maintenance application.

This claim is supported by McKinsey who estimate that improvements in operations from IIoT applications could be worth more than US$470 billion per year in 2025 in worksites and potentially more than US$360 billion per year would flow from improved equipment maintenance. By utilising sensors to monitor the operating efficiency of machinery in use, companies can shift to a condition-based maintenance model (maintaining equipment when there is an actual need through predictive analytics) rather than relying on a regular maintenance schedule or repairing equipment only when it breaks down.

2. The IIoT is a long term structural trend investors can benefit from

Investors can also benefit from the IIoT by investing in the companies that create the hardware and software which drive connectivity and monitoring in the IIoT. We believe this is an area where investors can invest now to benefit from a long term structural trend.

Some of the key players in this industry are General Electric who build the hardware that supports IIoT capabilities such as Predix. JPMorgan has estimated that over US$400m of General Electric’s oil & gas orders are either directly or indirectly attributed to Predix. The system also handles communications, mobility, and data management, and enables third party application development.

An example of the IIoT working in practice is General Electric’s recently announced partnership with the Noble Group on a “digital rig” solution, which incorporates its asset performance management systems and analytics capabilities in a four-rig pilot. General Electric will install digital sensors on the rigs and overlay its monitoring system to improve overall drilling performance and maintenance processes.

The digital rig solution will also provide real time data to offsite personnel worldwide, allowing them to monitor the drilling process and spot concerns before they occur. General Electric has also collaborated with IBM (IBM US) in creating products such as the “rig sentry” a blow-out preventer using predicative analysis on large oil rigs.

Source: TMT Analytics

IBM has also invested heavily in the IIoT, developing the software components for many of these products. IBM’s Watson is using machine learning technology to collect more relevant and specific data to better predict failures ahead of time. IBM is also leading the way with its cloud based technology which allows remote access to large industrial machinery from anywhere in the world. This technology has become particularly useful to mining and oil rig operations as they are usually located in remote areas and allow engineers to monitor their performance from either their head office or home.

Mitsubishi Electric, a subsidiary of Mitsubishi Corp (8058 JP), is experimenting with augmented reality software using Epson’s Moverio smart glasses to help air conditioner technicians perform repair services. Amazon.com (AMZN US) with its recent acquisition of Kiva Systems, now operates one of the world’s largest fleets of industrial robots in its warehouses, where humans and robots work side-by-side. This partnership can fulfil orders up to 70 per cent faster than a non-automated warehouse.

Untapped opportunities and associated hurdles

The potential of IoT is still in its infancy. The benefits and potential applications are very promising but remain largely untapped. There is a lot of potential to use the data that is being created more effectively. According to a report by Accenture, less than 1 per cent of the data being generated by the 30,000 sensors on an offshore oil rig is currently used to make decisions. This marks significant potential for growth as the technology develops further.

For now, implementing IoT in a business can be a costly activity, usually requiring a large capital investment and the payment of ongoing licencing fees to use the cloud based services. Part of this cost relates to interoperability – to effectively use the IoT to its full potential requires interoperability across a variety of different devices and service providers so that they can all work together to provide accurate data. However, costs associated with the IoT are likely to fall over time with a growing number of companies adopting the technology as applications for IoT broaden.

Security implications from IoT

The IoT also brings with it security and privacy risks. Risks from cyberattacks is the most commonly cited concern by businesses and consumers. The IoT effectively increases the “surface area” available for breaches as more things are connected with each node becoming an entry point for attack. Applications like self-driving cars or home security pose a serious concern to the health and wellbeing of people if they are compromised. The potential for illegitimate access to household and business data are further concerns.

Synonymous to security, there are also concerns about privacy and confidentiality, ranging from sensitive personal information collected by health and wellbeing applications to trade secrets guarded by large multi-national companies.

Nevertheless, we believe the IoT is an area where investors can invest now to benefit from a long term structural trend, particularly in those service providers who are supplying the software and hardware enabling the IoT. Ironically, the greater the security threat from IoT, the more financial benefits these companies may gain as their customers become more willing to pay for higher end secure IoT systems.

At the time of writing, the AtlasTrend Big Data Big Fund owned shares in Amazon.com and IBM. Find out more about why we have invested in these companies here and click “Learn More” on the company cards.

*The information above does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.

About the author

Kevin Hua is the co-founder of AtlasTrend which is a member of the Which-50 Digital Intelligence Unit. Members contribute their expertise for the benefit of our readers. Membership fees apply.

The Author

Kevin Hua

Kevin Hua is a Co-Founder of AtlasTrend. AtlasTrend’s team is a group of highly experienced professionals across multiple disciplines. In particular, the investment team alone has over 45 years of combined investment and financial markets experience. This includes a strong track record of investment management experience having managed over $2 billion for investors in listed international equities. AtlasTrend was created in 2015 to build a new investment service to help our customers learn and invest with purpose in long term world trends

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